Hong Kong – Why Octopus Cards needs new business initiatives

As competition heats up in Hong Kong’s e-payments market, the city’s dominant smart-card operator, Octopus Cards Ltd., is seeking to expand into a new business segment: online shopping payments.

The company, whose stored-value cards are used daily by millions of Hongkongers to pay for public transport and other small transactions, feels it needs to look beyond its traditional business if it wants to keep deep-pocketed players from China such as Alipay and WeChat Pay at bay.

CEO Sunny Cheung has told the Hong Kong Economic Journal that his firm is seeking partnerships with international payment firms so as to allow its card users to settle their online purchases through Octopus.

He didn’t elaborate on the discussions but suggested to another media outlet that an initiative could be launched by the end of this year.

If plans succeed, Octopus could partner with well-known global payment platforms such as Visa, MasterCard, American Express and PayPal as well as China’s Unionpay to make Octopus Cards globally acceptable.

For that to happen, an issue must be resolved first: how to link Octopus card value into a global payment platform.

Currently, Octopus is mostly for offline use as people mostly swipe the card to get onto a train or a bus or to pay for a drink in a coffee shop. People top-up their cards periodically to ensure there is sufficient balance to enable successful completion of transactions. But the card itself does not come with an account that will enable others to transfer funds into the card. Though the firm launched its own digital wallet O!ePay service recently, the service cannot have direct link of the wallet.

Octopus Cards needs O!ePay to become a fully online and offline payment platform for users, not just for transport payment. Just like Tap & Go, which has partnered with Mastercard and Unionpay, allowing its users to use either platform in the online and offline world. Tap & Go users have two virtual cards in their mobile wallet and share the same pool of funding under one Tap & Go account. In addition, users can make payment via a QR code or Apple Pay and Google Pay.

Octopus Cards has been a market leader in offline payment for two decades as it has dominated the public transport fare payment system and was the only payment option on transit systems apart from cash.

However, as railway operator MTR has begun to open the door for Chinese players Alipay and WeChat Pay in its system, Octopus Cards has reason to worry that its dominance in the public transport market may come under threat, especially when it comes to inbound tourists.

The company needs to diversify its business model and upgrade its system to reduce its reliance on the traditional revenue source. Otherwise, it could see its growth prospects get curbed.

As competition escalated in the market, MTR’s share of profit from Octopus Holdings has decreased by 30.5 percent to HK$173 million in 2017, the first ever decline since Octopus was founded two decades ago. Given that MTR holds 57.4 percent stake in the Octopus Holdings, it means that Octopus’ full-year earnings stood at around HK$300 million last year.

While Octopus is gearing up to expand its coverage to serve more retailers, especially independent shop owners, in a bid to help them get into mobile payment deployment, the company may need to consider a further step and try to be a bank or financial institution in the long term to support its business growth.

Given the changing market situation, it is reasonable to expect that Octopus Cards, among other initiatives, applies for a virtual bank license from the Hong Kong Monetary Authority, a move that can help grow its business from offline to online and also secure better returns on the funds it holds.

The company, in fact, used to be a deposit-taking entity for a long time in its early days due to its business nature of keeping cash in the Octopus system for payment. The firm is now a Stored Value Facility licensee which can provide online and offline payment service in Hong Kong. That’s the reason why Octopus was able to extend its business to online through the launch of O!Epay service in recent years.

With its huge user base and frequent usage, it may be better for Octopus to consider applying for a virtual bank license to operate purely online without physical branches.

Virtual bank permit will allow Octopus to provide full banking service without brick-and-mortar branches and offer flexible services to customers, including those without minimum deposit requirement or minimum service charge.

Provision of more digital services can help Octopus defend its market share, just like Alipay did in China by offering various investment products.

The initiative will encourage young people to open a new bank account within the Octopus app, allowing them to enjoy different banking products and services on their mobile devices.